U.S. bankers drop lawsuit against regulators over Volcker rule

WASHINGTON Wed Feb 12, 2014 5:47pm EST

WASHINGTON Feb 12 (Reuters) - A group that represents banks' interests dropped its lawsuit against U.S. financial regulators over a proprietary trading ban known as the Volcker rule, the group's chief executive said on Wednesday.

"We believe the best opportunity to pursue successful resolution of these issues is to constructively engage with the regulators without the chilling impediment of pending litigation," Frank Keating, head of the American Bankers Association, said in a statement.

The Volcker rule bans banks from making risky trades with their own money and limits investments in certain funds. It was required by the 2010 Dodd-Frank law and written by the Federal Reserve, Securities and Exchange Commission and other agencies.

When the rule was finalized in December, small banks complained that it would force them to dump investments in trust-preferred securities, or TruPS, which have hybrid characteristics of debt and equity.

The banks claimed it was an unintended consequence of the rule that would cost them money. The bankers' association sued the regulatory agencies that wrote the rule over the dispute.

Regulators responded in January by tweaking the rule to allow firms to hang onto certain TruPS-backed investments if the banks purchased them before the Volcker rule was finalized.

At the time, the bank group said it appreciated the changes but needed to consult its members before dropping the lawsuit.

Keating said the group still believes the Volcker rule will be costly for small banks, but added that regulators appeared willing to address unanticipated problems with the rule.

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